SUCCESSFUL INVESTING: Amazon.Com Stock Gets a ‘Hold’ Rating

By Andrew Leckey

Q. Is there hope for my shares of Amazon.com Inc.? I wonder about that company. – L.R., via the Internet

A. As it accepts a flood of preorders for "Harry Potter and the Deathly Hallows," the final installment of the famous series due out at midnight July 21, the aggressive Internet retailer itself could benefit from a little magic.

It offers an innovative array of new merchandise that has expanded far beyond books, music and videos. Yet there’s no crystal- ball answer as to whether that can be transformed into long-term growth and profitability, or whether cut-rate shipping and hefty technology expenditures will be too costly to maintain.

Shares of Amazon.com Inc. (AMZN) are down about 2 percent this year after a decline of 16 percent last year.

In customer satisfaction, Amazon.com is surpassed only by the BarnesAndNoble.com site among retailers and service providers, according to the University of Michigan’s American Customer Satisfaction Index survey for 2006. On a 100-point scale, it scored 87 vs. 88 received by BarnesAndNoble.com.

Promotions such as a reduced-price Xbox 360 helped propel the firm to No. 1 in online retail sales during the holiday season, according to ComScore Networks Inc. research. Quarterly sales increased 34 percent in the fourth quarter, but profits fell 51 percent due in part to higher taxes.

Amazon.com is a prolific spender with a lot of debt and profit margins that appear to have reached a limit. Some of its products, such as groceries and toys, are not sure things.

Its new Web site, Endless .com, features handbags and shoes with free overnight shipping. It had been selling those items on Amazon.com since 2002.

It has been expanding its Askville.com research site, in which its users supply questions and answers, since Google Inc. abandoned efforts in that field.

Through the new Amazon Unbox on TiVo service, consumers watch movies and TV shows downloaded from the Internet on their TV sets through their TiVo digital-video recorders. TiVo subscribers can rent or purchase TV shows and movies. The Amazon Unbox Video Download service, which does not require TiVo, was launched in September.

Consensus recommendation on Amazon.com shares among analysts who track them is a "hold," according to Thomson Financial. That consists of three "strong buys," three "buys," 12 "holds," nine "underperforms" and two "sells."

Earnings are expected to increase 49 percent this year vs. 11 percent forecast for the Internet software and services industry. Next year’s projected 39 percent rise compares to 15 percent expected industrywide. The five-year annualized gain is forecast at 22 percent vs. 14 percent for its peers.

Q. Please give your opinion on the Royce Opportunity Fund. I wonder if I could do better. – R.S., via the Internet

A. It depends on whether you lust for adventure.

Boniface Zaino, portfolio manager since 1998, has seen fire and rain. A deep-value investor since the early 1970s, Zaino has experienced every market cycle several times and therefore has no qualms about buying cheap and waiting patiently for a revival.

He owns a whopping 275 stocks; his top position represents less than 1 percent of assets, so there is little risk from any single stock. But his emphasis on tiny micro-cap companies means some volatility is inevitable.

The $2.52 billion Royce Opportunity Fund (RYPNX) is up 9 percent over the past 12 months to rank above the midpoint of small value funds. Its three-year annualized return of 16 percent puts it in the lower half of its peers.

"Over long time periods, Royce Opportunity can be stellar, but after a big run it typically won’t do well for a while until there’s another big run," said Todd Trubey, an analyst with Morningstar Inc. in Chicago. "If you aren’t willing to take the ups and downs, you won’t be satisfied with this fund."

Because the fund has grown significantly, it is not as nimble as it once was. But that is less of a handicap because Zaino buys several stocks within the same industry and doesn’t hold too much of any one stock, Trubey said.

Undervalued asset plays, turnaround stories, undervalued growth opportunities and interrupted earnings are Zaino’s bread and butter. The fund would work well in an investor portfolio that has many large-cap holdings. William Hench became the fund’s assistant portfolio manager in 2004.

Industrial materials and technology hardware each represent more than one-fourth of the portfolio, with business services another concentration. Largest holdings were recently Carpenter Technology Corp., Gerber Scientific Inc., Robbins & Myers Inc., Park Electrochemical Corp., Landry’s Restaurants Inc., Scholastic Corp., Dillard’s Inc., Analogic Corp., Spartech Corp. and Flow International Corp.

This "no-load" (no sales charge) fund requires a $2,000 minimum initial investment and has an annual expense ratio of 1.14 percent.

Leckey answers questions only through the column. Address inquiries to Andrew Leckey, P.O. Box 874702, Tempe, AZ 85287-4702, or by e-mail at andrewinv@aol.com.

(c) 2007 Charleston Gazette, The. Provided by ProQuest Information and Learning. All rights Reserved.